CARPE DIEM

Professor Mark J. Perry's Blog for Economics and Finance

Thursday, May 31, 2012

April Restaurant Index Above 100 for 6th Month

"The outlook for the restaurant industry remained positive for the coming months, as the National Restaurant Association’s Restaurant Performance Index (RPI) stood well above 100 in April. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.6 in April, down 0.6 percent from the strong level of 102.2 registered in March. Despite the decline, April represented the sixth consecutive month that the RPI stood above 100 (see red line in chart above), which signifies expansion in the index of key industry indicators.

Although the Restaurant Performance Index dipped somewhat in April, it remained solidly in positive territory. Restaurant operators reported positive same-store sales for the 11th consecutive month, and a majority of them expect business to continue to improve in the months ahead.

The Expectations Index, which measures restaurant operators’ six-month outlook for four industry indicators (same-store sales, employees, capital expenditures and business conditions), stood at 102.2 in April – down slightly from a 15-month high of 102.4 registered in March (see red line in chart). April also represented the eighth consecutive month that the Expectations Index stood above 100, which signifies a positive outlook among restaurant operators for business conditions in the coming months."

MP: Further evidence of an improving outlook for U.S. restaurants is provided by Census data showing that sales for "Food Services and Drinking Places" were up by 8.5% in April from a year earlier, following a 7.4% increase in March.
After being flat in 2008 and 2009, sales at "food services and drinking
places" are now 17% above the June 2009 level when the recession
officially ended, and set a new monthly record high (in both real and nominal dollars) of almost $44 billion in April.

Moreover, sales at "Full Service Restaurants" set a new monthly record high (both nominal and real dollars) of $20.4 billion in March, and were up by 13.1% year-over-year, following a 13.7% increase in February.
The relevant data suggest that the restaurant industry has made a full
recovery from the recession and is now operating back above
pre-recession levels for inflation-adjusted sales. Regardless of how consumers answer confidence survey questions, the strong improvements in restaurant sales and the RPI in recent months would indicate that tracking actual consumers spending on restaurant meals is reflecting a high level of consumer confidence.

March U.S. Oil Production Highest Since 1998

Domestic Oil Production is Booming in North Dakota and Texas on Private Land: It's the Fuel of the Future

The Department of Energy released data today showing that U.S. field production of crude oil came close to reaching a 14-year high in March, with average daily production of 6.26 million barrels. That was the highest average daily oil production in any month since June 1998, almost 14 years ago, when average output was slightly higher at 6.267 million barrels.

March oil production was 11% ahead of last year, as 630,000 more barrels were produced on average each day in March compared to last year. Production increases of 215,000 more barrels per day in North Dakota in March of this year, and 388,000 more barrels per day in Texas were responsible for most of the overall national increase of 630,000 barrels per day.

It should be noted that these significant increases of crude oil production in North Dakota and Texas over the last year are taking place mostly on private and state lands, and have nothing to do with President Obama's "All-of-the-above" energy policy he introduced in his January State of the Union address.

"Even the government’s own forecasts predict that renewable energy will continue to play a relatively minor role as an energy source over the next several decades out to the year 2035. And traditional energy sources like oil, gas and coal will continue to provide the overwhelming share (more than three-quarters) of the fuel required to meet U.S. energy demand for the next three decades at least.

By favoring new, costly, subsidy-dependent alternative energy sources over traditional sources, and by not fully supporting the proven, job-creating, low-cost fossil fuels, it would be more accurate to describe President Obama’s costly energy strategy as “some of the most costly above” instead of “all-of-the-above.”

What we really want is an energy policy that is not based on “all-of-the-above” or “some of the above,” regardless of cost, reliability, and economic and scientific merits, but rather an energy policy that is grounded in the logic of “all of the energy sources that are actually cost-competitive.”

President Obama might wish for an energy future of alternative energy, but the scientific and economic realities suggest that the "fuels of the future" will mostly be the same as the "fuels of the past" — dependable, reliable and low-cost oil, natural gas, coal and nuclear."

Oil Prosperity Update for Eagle Ford Texas

1. Fuel Fix -- "Robust drilling activity in the Eagle Ford Shale is rescuing the state’s lodging sector. San Antonio-based Source Strategies says in its newest Hotel
Brand Report that hotels in the counties with the most oil-and-gas
production were responsible for 75% of the $151.3 million in
additional revenues hotels produced statewide between the first quarter
2011 and the first quarter this year. That occurred even though those oil-and-gas-rich areas account for
only 38% of the 395,100 hotel rooms in Texas. The rest of the
hotel sector recorded insignificant revenue gains of 3.2%.

“The economic impact of oil and gas is huge,” said Bruce Walker, president of Source Strategies."

2. Corpus Christi —
"The sales tax revenue bump generated by Eagle Ford Shale production
could have a positive effect on local governments’ creditworthiness,
according to analysis by a noted rating agency.

A study by Moody’s Investor Service showed increased revenues could
have a “credit positive” effect on bond ratings for 61 entities Moody’s
rates across a 20-county region of South Texas impacted by Eagle Ford
development."

Markets in Everything: Belgian Soccer Fans for Sale on eBay to Root for Your Country in Euro 2012

"Once again we Belgians have no team to root for at the Euro 2012 soccer championship. Since tournaments are much more fun when you have a favorite team, we decided to put our fandom for sale on eBay. All profits will be sent directly to Unicef.

What is for sale: During Euro 2012, all members of this Facebook Group will root for the national soccer team of the highest bidder, or the national team of his choice. Even if it's Holland. We will watch the games, wear the colors, possibly even buy the flag and learn the national anthem. Pictures and videos will be made and sent to the winning bidder to be posted on his or her website. Slight hooliganism is available at extra cost. We can, for example, kick a pigeon or smoke in a non-smoking area if such pleases our master.

Once the team is eliminated, we will grieve for 24 hours and then put ourselves for sale again on eBay. Hopefully joined by the previous winner since he or she will also have become an orphaned soccer fan by then."

ASA Staffing Index for Temporary and Contract Employment is Highest for Week 21 Since 2008

The American Staffing Association's (ASA) Staffing Index for temporary employment activity rose to 94 last week, which was the highest index reading for Week 21 since 2008 when the index was also 94. It's just several points below the 96 index level for the comparable week in 2007. It's also the highest weekly reading so far this year, and 8% above its year earlier level. The ASA Staffing Index has historically been a leading indicator for the overall labor market, and the upward trend this year in the index to a four-year high last week could be an indication of broader-based employment gains over the summer months.

Markets in Everything. Or Not. No More Gender Based Price Discrimination in New York City

WSJ -- "In New York City, 38 businesses have been hit this year for violating a
little-known provision that has many pulling their hair: gender-pricing
discrimination. The majority of violations so far this year—103—were
issued to salons and barbershops.

The city's Department of Consumer Affairs began stepping up
enforcement of the law last year, when it issued 580 gender-pricing
violations to businesses, more than double the 212 doled out the year
before. "We wanted to really send a strong message to businesses about this
kind of illegal pricing, so we did a very focused sweep over the course
of the year," said the department's commissioner, Jonathan Mintz. "That
sweep was largely targeted at salons and barbershops and laundry and dry
cleaning." The fines for first-time violations range from $50 to $200, while those for subsequent ones are $100 to $500.

"This is a very basic consumer-protection law and it is also a very basic civil-rights law," said Mr. Mintz. "I think there are completely legitimate reasons to charge different
prices for different services and that one should be specific for what
those reasons are," he added. "Reasons are not chromosomes."

While salons have received the most violations so far this year, in
2011 laundry and dry-cleaning businesses received 272 violations,
compared with 269 for salons. In 2010, on the other hand, dry cleaners
had only five violations, while "miscellaneous nonfood retail," which
includes salons, had 207 violations."

"From Canada to Colombia to Brazil, oil and gas production in the Western Hemisphere is booming, with the United States emerging less dependent on supplies from an unstable Middle East. Central to the new energy equation is the United States itself, which has ramped up production and is now churning out 1.7 million more barrels of oil and liquid fuel per day than in 2005.

“There are new players and drivers in the world,” said Ruben Etcheverry, chief executive of Gas and Oil of Neuquen, a state-owned energy firm that is positioning itself to develop oil and gas fields here in Patagonia. “There is a new geopolitical shift, and those countries that never provided oil and gas can now do so. For the United States, there is a glimmer of the possibility of self-sufficiency.”

Oil produced in Persian Gulf countries — notably Saudi Arabia, Iran, the United Arab Emirates, Kuwait and Iraq — will remain vital to the world’s energy picture. But what was once a seemingly unalterable truth — that American oil production would steadily fall while the United States remained heavily reliant on Middle Eastern supplies — is being turned on its head.

Perhaps the biggest development in the worldwide realignment is how
the United States went from importing 60 percent of its liquid fuels in
2005 to 45 percent last year (MP: Net oil imports have since fallen to a 20-year low of 42.4% this year through April, see chart above). The economic downturn in the United
States, improvements in automobile efficiency and an increasing reliance
on biofuels all played a role.

But a major driver has been the
use of hydraulic fracturing. By blasting water, chemicals and tiny
artificial beads at high pressure into tight rock formations to make
them porous, workers have increased oil production in North Dakota from a
few thousand barrels a day a decade ago to nearly half a million
barrels today.

Conservative estimates are that oil and natural gas
produced through “fracking,” as the process is better known, could
amount to 3 million barrels a day by 2020. “We have a revolution
here,” said Larry Goldstein, director of the Energy Policy Research
Foundation in New York. 'In 47 years in this business, I’ve never seen
anything like this. This is the equivalent of a Category 5 hurricane.'"

Dueling Consumer Confidence Reports

1. Last Friday, Thomson Reuters/University of Michigan reported that its consumer sentiment index
increased in May for the ninth straight month. That set a new record
for the most consecutive monthly increases in the history of the index
going back to 1978. It was also the most upbeat American consumers have
been in more than fours years, since October 2007 before the recession
started. Bloomberg reported that "A record number of households said they'd heard better news on the jobs
outlook, which combined with cheaper gasoline and an improving housing
market may help sustain consumer spending and shield the economy from
Europe's debt crisis."

2. This morning, Gallup reported that its Economic Confidence Index held at -16 last week, the highest index level in the four-plus years of Gallup Daily tracking in
the United States.

3. Also this morning, The Conference Board reported that its consumer confidence index fell to a five-month low in May, as Americans were less optimistic about
current labor market and business conditions, as well as the short-term
outlook.

What are we to make of these conflicting consumer confidence reports? Perhaps it's a reflection of the weakness in survey-based measures of consumer confidence, or that surveys have large margins of error?

In other news today, S&P reported that its Case-Shiller Home Price Indexdropped in March by 2% to a post-crisis low. Note that the Case-Shiller home price index is calculated based on a three-month moving average with a two month lag and is therefore based on home prices in January, February and March. The sales and price gains I was reporting recently were for April, and those improvements won't be captured by the Case-Shiller index until next month's report.

IJ Helps Caveman Blogger Fight for Free Speech

The Institute for Justice asks a very important question: "Can the government throw you in jail for offering advice on the Internet about what food people should buy at the grocery store?"

"That is exactly the claim made by the North Carolina Board of Dietetics/Nutrition. In December 2011, diabetic blogger Steve Cooksey started a Dear Abby-style advice column on his popular blog (www.diabetes-warrior.net) to answer reader questions. One month later, the State Board informed Steve that he could not give readers advice on diet, whether for free or for compensation, because doing so constituted the unlicensed, and thus criminal, practice of dietetics. The State Board also told Steve that his private emails and telephone calls with readers and friends were illegal, as was his paid life-coaching service. The State Board went through Steve's writings with a red pen, indicating what he may and may not say without a government-issued license."

"But the First Amendment does not allow the government to ban people from sharing ordinary advice about diet, or scrub the Internet—from blogs to Facebook to Twitter—of speech the government does not like. North Carolina can no more force Steve to become a licensed dietitian than it could require Dear Abby to become a licensed psychologist."

"That is why on May 30, 2012, Steve Cooksey joined the Institute for Justice in filing a major free speech lawsuit against the State Board in the U.S. District Court for the Western District of North Carolina, Charlotte Division. This lawsuit seeks to answer one of the most important unresolved questions in First Amendment law: When does the government's power to license occupations trump free speech?"

The ChicagoFederal Reserve reported today
that its Midwest Manufacturing Index increased 2.4% in April compared to March, following a
revised 0.22% monthly decline in March. The April increase was the largest monthly gain in Midwest manufacturing activity since September 2003, more than 8 years ago, and brought the index to the highest level since June 2008, almost four years ago.

Here are some
highlights of manufacturing activity in the 7th Federal Reserve district
that covers Illinois, Indiana, Iowa, Michigan, and Wisconsin:

1. Manufacturing output in the Midwest region rose 12%
from a year earlier in April, more than twice the 5.8% increase in
national manufacturing output over the same period (see chart). In comparison, the overall U.S. economy (real GDP) grew by only 2.1% in the period from Q1 2011 to Q2 2012.

2. Regional machinery output in April gained 11.5% from its year-earlier level, compared to a 6.6% increase in machinery output at the national level.

3. Regional steel output improved 10.7% from its April 2011 level, compared to a 7.6% increase in national steel output over that period.

4. The Midwest’s automotive output increased by a whopping 28.2% in April from its year-ago level, compared to a 16.4% gain in national automotive output.The index level of 99.6for Midwest auto sector production in April was at the highest level since November 2007, indicating that the auto industry in the Midwest has now made a complete recovery from the effects of the Great Recession.

MP: Midwest manufacturing output growth continues to lead national manufacturing output growth, which continues to lead overall economic growth measured by real GDP. The lastest Chicago Fed report suggests that U.S. manufacturing, especially in the Midwest, remains at the forefront of the economic recovery measured by growth rates in output. In another milestone for manufacturing, Midwest automotive production in April returned to its pre-recession 2007 level for the first time since the recession started in December 2007.

Monday, May 28, 2012

A Tutorial for the President on Profit Maximization

Writing in the WSJ last week, economics professor Paul Rubin "takes the community organizer-in-chief to task for his dismissive comments about profit maximization" (ht/E. Frank Stephenson):

"In justifying his attacks on Bain Capital, President Obama argues
that "profit maximization" might be an appropriate goal for a
private-equity firm, but not for more general public policy. This
argument ignores one of the most basic premises of economics.

We economists assume that firms always maximize profits, and that
profit maximization by firms (all firms, not just private-equity ones)
is a very good thing. But this is not because profits are in themselves
good. Rather, profit maximization is good because it leads directly to
maximum benefits for consumers. Profits provide the incentive for firms
to do what consumers want.

Consider the converse: What if a business does not maximize profits?
Then it is either not making the products that consumers want the most,
or it is not producing its products at the lowest cost. In either case,
consumers are harmed. Any argument against "profit maximization" is an
argument against consumer welfare.

Maximizing consumer welfare is the ultimate justification for an
economy. Consumers are of course also workers and voters. Contrary to
President Obama's claim, skill at profit maximization does translate
directly into skill at governing the economy. Failure to understand this
simplest and most basic point is probably itself enough to disqualify
someone from the presidency when economic issues are paramount."

MP: Another good time to invoke the sagacious words of Frederic Bastiat below:

"Treat
all economic questions from the viewpoint of the consumer, for the
interests of the consumer are the interests of the human race."

It's Time to Ditch the College-for-All Crusade

"The college-for-all crusade has outlived its usefulness. Time to ditch
it. Like the crusade to make all Americans homeowners, it’s now doing
more harm than good. It looms as the largest mistake in educational
policy since World War II, even though higher education’s expansion also
ranks as one of America’s great postwar triumphs.

Consider. In 1940, fewer than 5 percent of Americans
had a college degree. Going to college was “a privilege reserved for
the brightest or the most affluent” high-school graduates, wrote Diane Ravitch in her history of U.S. education, “The Troubled Crusade.” No more. At last count, roughly 40 percent
of Americans had some sort of college degree: about 30 percent a
bachelor’s degree from a four-year institution; the rest associate
degrees from community colleges.

Starting with the GI Bill in 1944, governments at all levels promoted college. From 1947 to 1980, enrollments jumped from 2.3 million to 12.1 million. College became the ticket to the middle class, the be-all-and-end-all
of K-12 education. If you didn’t go to college, you’d failed. Improving
“access” — having more students go to college — drove public policy.
We overdid it. The obsessive faith in college has backfired.

For starters, we’ve dumbed down college.
The easiest way to enroll and retain more students is to lower
requirements. Even so, dropout rates are high; at four-year schools, fewer than 60 percent of freshmen graduate within six years. Many others aren’t learning much.

The real concern is the quality of graduates at all levels. The fixation
on college-going, justified in the early postwar decades, stigmatizes
those who don’t go to college and minimizes their needs for more
vocational skills. It cheapens the value of a college degree and spawns
the delusion that only the degree — not the skills and knowledge behind
it — matters. We need to rethink."

MP: The chart above shows graphically the results of the "college-for-all crusade." In the 1970s and 1980s only about one out of three high school graduates went on to college. Now about half of all high school graduates attend college. And most of them now graduate with student loan debt of $25,000 and many are having a hard time finding a job.

Fuel Sources for U.S. Energy Demand to 2035

According to the latest forecasts from the Department of Energy in its latest Annual Energy Outlook, the fossil fuel (coal, natural gas and oil) share of energy consumption will fall only slightly in the future, from 83 percent of total U.S. energy demand in 2010 to 77 percent in 2035 (see chart). On the other hand, the future of renewables is not looking so bright, in terms of its future contribution to America's energy demand. In 2010, renewables (wood, municipal waste,
biomass, and hydroelectricity in the end-use sectors;
hydroelectricity, geothermal, municipal solid waste, biomass, solar, and
wind for generation in the electric power sector; and ethanol for
gasoline blending and biomass-based diesel in the transportation
sector), contributed only about 7% of U.S. energy consumption, and that was less than the 8.9% share back in 1983. Even by 2035, more than twenty years from now, renewables as a fuel source are expected to provide less than 11% of total energy demand.

Bottom Line: The scientific and economic reality (and even the government's own forecasts support this) is that affordable and reliable hydrocarbons will continue to be the major source of energy that will fuel America's economy well into the future, despite Obama's embrace of alternative energies as the “energies of the future,” and his dismissal of oil as a "fuel of the past." Hydrocarbon energy is America’s future, and it’s the energy treasures beneath our feet that will continue to power the U.S. economy for many generations to come.

Oil Prosperity Comes to Karnes City, TX

KARNES CITY, TEXAS - "Sitting in the bank manager's office, the man turned to his wife. "Show it to him, Mama," he said as they settled into wooden chairs across from Paul Brysch in the Karnes County National Bank. She nodded, slid an envelope from her purse and handed it to Brysch. A check for more than $300,000 was inside, the first royalty check
from an Eagle Ford Shale well drilled on their property on the edge of
Karnes County.

"Congratulations! Y'all must be thrilled!" Brysch said. "No, no, you don't understand," the man said, furrowing his brow.
"We've never had money like this before. What do we do with it?"

The question has been repeated across the Crossroads since the Eagle
Ford Shale play began booming, but nowhere is it more poignant than in
Karnes County. These days, the county is a lively place, the epicenter
of an oil boom changing the face of South Texas and bringing wealth to
people who have struggled and scraped for generations just to keep hold
of their land."

Sunday, May 27, 2012

U.S. Declines to Stop China From Sending Foreign Aid to American Consumers through Low Prices

WASHINGTON -- "The Obama administration may be getting tougher with China on trade on behalf of U.S. producersseeking to reduce foreign competition, but its approach in dealing with Beijing on the thorny currency issue remains patient diplomacy, especially because China's currency policy does generate huge cost advantages for American consumers and businesses purchasing their products.

The Treasury Department,
in its semiannual report Friday on exchange-rate policies, once again
refrained from labeling China a currency manipulator -- an accusation
that would embarrass Beijing and trigger negotiations and possibly even
lead to U.S. sanctions that would raise prices for American consumers and businesses purchasing Chinese imports.

The Treasury report made plain
that U.S. officials believe that China’s currency, the yuan, remains
“significantly undervalued,” saving Americans billions of dollars annually. An artificially cheaper yuan gives Chinese
exportersAmerican consumers an extra price advantage in sellingpurchasingtheirChina's goods in the U.S.
But Treasury still declined to cite China on behalf of American producers competing against China's everyday low prices, saying that the Chinese have
made progress in correcting currency and related imbalances and also
have assured the U.S. that they would move more quickly to adopt a more
flexible, market-based exchange-rate system, even though that could disadvantage American households by raising prices on China's exports to the U.S.

MP: This is a good time to invoke French economist Frederic Bastiat, and thank China for its currency policy that saves American consumers billions of dollars every year, and in the process raises our standard of living:

"Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race."

Thank you poor citizens of China, on behalf of rich American consumers, for the generosity of your government. We appreciate the transfer of wealth that results from your currency policy, from a relatively poor country to the consumers of an advanced, rich country. It's really not necessary, but cost-conscious American consumers will gladly accept the foreign aid you send us by keeping our currency overvalued, and in the process, your products undervalued. Thank you for the "everyday low prices" for products "Made in China."

After the Bust, The Boom Eventually Happens; Some New Homes in Vegas Are Getting 15 Offers

1.AEI fellow Alex Pollock in his book "Boom and Bust" (emphasis mine):

"It was thought that a serious fall in house prices would not, and probably could not, happen nationwide and drag down the entire national average. Many professional observers - realtors, bankers, financial analysts, investors and credit raters - believed that the national home price average might stagnate for a year or more, but nearly everyone also thought that it could not actually go down. So even the mortgage finance professionals, by and large, thought that house prices would not fall on a national basis, let alone by 30 percent! But they did."

"We should know from experience that many things once considered impossible have nonetheless come to pass. Afterward, we wonder why they were considered impossible. In the midst of the crisis and the bust, the recovery of housing, mortgage and financial markets, the banking system, and the general economy feels impossible, but nonetheless eventually happens."

"Las Vegas homebuilders can’t build houses fast enough these days to keep up with buyers’ demand. Yes, you read that right. The valley’s new home market is booming. Developers say they haven’t built, or sold, so many houses in years.

“I’m as much as 80 to 90 percent higher in volume than last year,”
said Robert Beville, president of Harmony Homes. “I’ll probably more
than double my deliveries this year.”

Applications for new home permits in Henderson, North Las Vegas, Las
Vegas and Clark County have increased 40 percent from last year.
Prices have risen 6 percent to an average of $201,000, and sales have
jumped 20 percent. By June, experts expect to see 500 new-home closings a
month.

There are 20 percent fewer single-family homes available on the Multiple Listing Service today than last year. There are 30 percent fewer condos and townhouses. Properties that a year ago would have sat on the market for weeks or
months are now getting as many as 15 offers. List prices
have become minimums. Most existing homes are selling for thousands
more.

That’s if buyers can get them. A little more than 5,000 units are
available for sale right now, the fewest since 2006 and an almost 60
percent drop from last year. Market conditions have combined to make it
difficult for most buyers to purchase older homes.

Perhaps the biggest winners in the revived housing market are
construction workers, particularly specialists. Framers, for example,
are in high demand. Many left the state when the housing market
deflated, and the ones who stayed took jobs in other fields. Now,
homebuilders are entering bidding wars to hire those who are left."

Today's Grade-Inflated, Lake Wobegon World; Letter Grade of A Now Most Common College Grade

In 1960, the average undergraduate grade awarded in the College of Liberal Arts at the University of Minnesota was 2.27 on a four-point scale. In other words, the average letter grade at the University of Minnesota in the early 1960s was about a C+, and that was consistent with average grades at other colleges and universities in that era. In fact, that average grade of C+ (2.30-2.35 on a 4-point scale) had been pretty stable at America's colleges going all the way back to the 1920s (see chart above from GradeInflation.com, a website maintained by Stuart
Rojstaczer, a retired Duke University professor who has tirelessly
crusaded for several decades against "grade inflation" at U.S.
universities).

By 2006, the average GPA at public universities in the U.S. had risen to 3.01 and at private universities to 3.30. That means that the average GPA at public universities in 2006 was equivalent to a letter grade of B, and at private universities a B+, and it's likely that grades and GPAs have continued to inflate over the last six years.

"A University of Minnesota chemistry professor has thrust the U into a
national debate about grade inflation and the rigor of college, pushing
his colleagues to stop pretending that average students are excellent
and start making clear to employers which students are earning their
A's.

"I would like to state my own alarm and dismay at the degree to which
grade compression ... has infected some of our colleges," said
Christopher Cramer, chairman of the Faculty Consultative Committee. "I
think we are at serious risk, through the abandonment of our own
commitment of rigorous academic standards, of having outside standards
imposed upon us."

National studies and surveys suggest that college students now get
more A's than any other grade even though they spend less time studying. Cramer's solution -- to tack onto every transcript the percentage of
students that also got that grade -- has split the faculty and
highlighted how tricky it can be to define, much less combat, grade
inflation."

MP: As one University of Minnesota
undergraduate student explained the rising GPA trend when evaluating a
professor known as a rigorous grader, "We live in a grade-inflated
world." That University of Minnesota anthropology professor Karen-Sue
Taussig suspects that today's "grade-inflated world" can be traced to
the growing cost of a college degree, i.e. today's "tuition-inflated
world." As Taussig told the Star Tribune, "They're paying for it,
and they worked really hard, and they put in time, and therefore they
think they should get a good grade."

Last year, Professor Rojstaczer and co-author Christopher Healy published a research article in the Teachers College Recordtitled "Where A Is Ordinary: The Evolution of American College and University Grading, 1940–2009." The main conclusion of the paper appears below (emphasis added), and is illustrated by the chart below showing the rising share of A letter grades over time at American colleges, from 15% in 1940 to 43% by 2008. Starting in about 1998, the letter grade A became the most common college grade.

"Conclusion: Across a wide range of schools, As represent 43% of all letter grades,
an increase of 28 percentage points since 1960 and 12 percentage points
since 1988. Ds and Fs total typically less than 10% of all letter
grades. Private colleges and universities give, on average,
significantly more As and Bs combined than public institutions with
equal student selectivity. Southern schools grade more harshly than
those in other regions, and science and engineering-focused schools
grade more stringently than those emphasizing the liberal arts. It
is likely that at many selective and highly selective schools,
undergraduate GPAs are now so saturated at the high end that they have
little use as a motivator of students and as an evaluation tool for
graduate and professional schools and employers."

MP: The connections among "grade inflation, "tuition inflation," "college textbook inflation," and exponentially rising student loan debt are important. Perhaps students find it easier to accept rising tuition, higher textbook prices (many selling for $200-300 now), and $25,000 in average student loan debt if they at least graduate with mostly As and a GPA above 3.0? Even if they can't find a job, they can take pride in having "earned" an inflated GPA?

Saturday, May 26, 2012

Bank Earnings Reach 5-Year High in Q1 2012

The FDIC reported this week that bank profits in the first quarter of 2012 increased to $35.3 billion, the highest level in almost five years going back to the second quarter of 2007 (see chart above, data here). That represents a 23% gain from the first quarter last year, and a 38% improvement from the previous quarter. In other signs of improvements in the banking industry's financial condition, noncurrent loan rates and net chargeoff rates decreased in the first quarter this year compared to the same quarter last year, and in both cases there were decreases for all three loan categories: real estate, business and consumer.

Environmentalism as Religious Doctrine

"The hallmark of science is a commitment to follow arguments to their logical conclusions;
the hallmark of certain kinds of religion is a slick appeal to logic followed by a hasty retreat
if it points in an unexpected direction. Environmentalists can quote reams of statistics on the
importance of trees and then jump to the conclusion that recycling paper is a good idea. But
the opposite conclusion makes equal sense. I am sure that if we found a way to recycle beef,
the population of cattle would go down, not up. If you want ranchers to keep a lot of cattle,
you should eat a lot of beef.

Recycling paper eliminates the incentive for paper companies
to plant more trees and can cause forests to shrink. If you want large forests, your best
strategy might be to use paper as wastefully as possible — or lobby for subsidies to the
logging industry. Mention this to an environmentalist. My own experience is that you will
be met with some equivalent of the beatific smile of a door-to-door evangelist stumped by
an unexpected challenge, but secure in his grasp of Divine Revelation.

This suggests that environmentalists — at least the ones I have met — have no real interest
in maintaining the tree population. If they did, they would seriously inquire into the long-term
effects of recycling. I suspect that they don't want to do that because their real concern
is with the ritual of recycling itself, not with its consequences. The underlying need to
sacrifice, and to compel others to sacrifice, is a fundamentally religious impulse."

Markets in Everything: Buy Your Wedding Toast

1. Buy a 3-5 minute customized wedding toast for $149, written for the best man, maid of honor, parents of the groom or bride, etc. from The Perfect Toast.

2. For a cheaper alternative ($18-20), you can buy fill-in-the-blank templates from Instant Wedding Toasts, along with an interactive workbook to help you write the perfect, personal speech as the best man, maid of honor, etc.

Let's Repeal Deadly Prohibition On Kidney Sales

"Every day, eighteen people die in the United States while waiting in vain for a kidney transplant, according to the National Kidney Foundation. The Department of Health & Human Services reports that more than 92,000 patients were on the kidney waiting list [updated as of today] (see chart above), but that only 16,812 transplants were made in 2011. That deadly math is part of the reason that, according to the National Institutes of Health, more than 380,000 Americans are on dialysis, a punitively expensive and physically grueling death-postponement procedure. The imbalance cannot be meaningfully addressed via cadaver-harvesting alone.

So we know that maintaining prohibition—letting the law be guided by our
moral revulsion toward placing price tags on human organs—will
certainly increase the body count. We know that boosting the number of
kidney donations from the living is the only real way to whittle the
waiting list down. And we also know, from such procedures as egg
donation, that legalizing monetary rewards is a guaranteed method for
expanding the pool of living donors. Your morality may vary, but mine
says that sentencing more than 6,000 people a year to an avoidable death
falls well short of the Golden Rule. My inquest therefore concludes
that the burden of argumentative proof on the legality of kidney sales
should fall squarely on those who back the lethal status quo.

This is not some academic exercise. People are dying right now because
we have let our revulsion at markets create serial prohibitions of
consensual behavior, whether it’s buying and selling marijuana, sex, or
kidneys. How many more people are we willing to let perish for this
mistake?"

"Oil and natural gas activity is booming again in South Texas. The 2008 discovery of the Eagle Ford Shale play has breathed new life into industry in the region, where many mature and declining fields have operated for more than 40 years. Perhaps the largest discovery of new oil reserves in the United States since Prudhoe Bay, Alaska, in 1968, the Eagle Ford Shale extends over 23 South Texas counties (see map above).

Its southern edge begins near Laredo and trends northeast toward Austin, producing large quantities of natural gas. The northern edge—the formation is about 50 miles wide—follows a similar trend but produces oil. A central zone is rich in condensates, also called natural gas liquids, valuable to the refining and petrochemical industry on the Texas Gulf Coast.

The race to exploit these new South Texas reserves began in late 2008 and is primarily the result of recent advances that unlocked the secret of extracting natural gas and oil from shale. This new technology—along with favorable prices, existing infrastructure and
ready access to the Gulf Coast refining and petrochemical complex—created the Eagle Ford Shale boom. Rapid oilfield development has brought new jobs, rising income and growing wealth to this historically low-wage, low-income area.

The Eagle Ford’s scale and speed of development proved so robust that they quickly overwhelmed previous efforts to comprehensively measure the economic impact. Recent data suggest that the oil boom’s impact on jobs, income and spending in the region has been profound.

Surging drilling activity has brought
strong employment and wage growth to most
of the counties in the Eagle Ford. Counties
located above oil and condensate deposits,
such as Dimmit, La Salle and McMullen, have
experienced the greatest increase in employment
and average weekly wages. Job growth
was strong from 2005 to 2008, likely fueled by
rising natural gas prices even before the Eagle
Ford Shale play began (see bottom chart above).

Jobs in the region sank with the recession
amid sharply dropping energy prices in
2009. From a low during first quarter 2010 to
third quarter 2011, jobs grew at an annual rate
of 5.9 percent, reaching 2.9 percent above the
previous peak value. By comparison, during
the same period, jobs statewide increased 2.4
percent and remained 0.01 percent below the
previous high.

Generally, Eagle Ford counties
represent about 2 percent of all Texas jobs.
Since the beginning of 2010, the 15,773 net
new jobs account for 6.9 percent of the state’s
net gain during the period. While recent activity
is impressive, more growth may lie ahead
to meet demand. The scale of development
has surpassed the capacity of local industry.
Hotels, restaurants and gasoline stations are
jammed with outside managers, crews and
technicians. As the Eagle Ford matures and
the local service industry expands, many outside
workers may become local residents and
employees.

Average weekly wages have grown
markedly in most Eagle Ford counties. For the 23 counties,
the average annualized growth rate in
the weekly wage during this period was 14.6%. By comparison, average weekly
wages rose 6.8% in Texas, from $875
to $966, and 6.3% in the U.S., from
$870 to $953. Given the strong growth in
employment and average weekly wages
in the Eagle Ford, seasonally adjusted total wages paid in its top five counties increased
at an annual rate of 63.4% during this
period, while the entire 23-county area saw
a 25% increase."

Friday, May 25, 2012

Markets in Everything: Two, or Sometimes Even Four, Cell Phones per Person in Nigeria

BBC News -- "If you must make a call to anybody's mobile phone in Nigeria, you
need to be understanding and patient - it can be a very frustrating and
annoying experience. In the first place, it takes luck for the call to get
through, and when both parties are connected, there is no guarantee that
you will hear each other or that the line will not drop after a few
seconds.

A conversation which normally
should not last two minutes may after several calls take 10 minutes and,
believe me, both of you will pay for every second. Being very practical people, Nigerians have devised a way, though expensive, to ease the problem.

Why wait for government regulators who are believed to be
more interested in the huge after-profit taxes accruing from the
networks than the satisfaction of subscribers? So everyone who can afford it has a minimum of two mobile phones from different operators. Some have as many as four. They use whichever is operational at any given time."

May Consumer Sentiment Highest in More Than 4 Years; New Record Set for Nine Straight Increases

In another important milestone for America's "Plow Horse Economy," the Thomson Reuters/University of Michigan consumer sentiment index increased in May for the ninth straight month. That sets a new record for the most consecutive monthly increases in the history of the index going back to 1978. It was also the most upbeat American consumers have been in more than fours years, since October 2007 before the recession started. The May increase brings consumer confidence back above pre-recession levels for the first time since the recession started in December 2007.

Here are links to news reports, one from the WSJ and one from Bloomberg, which says that "A record number of households said they'd heard better news on the jobs
outlook, which combined with cheaper gasoline and an improving housing
market may help sustain consumer spending and shield the economy from
Europe's debt crisis."

Q: Don't the oil speculators get some of the credit for driving down gas prices at the pump over the last two months and helping to boost consumer confidence in May?

Markets in Everything: Consumer 3D Printer

A $1,299 replicator for the home.

Makeusof.com -- "Cubify understands the problem with geeky, DIY, hard to build and calibrate printers; and their Cube aims to solve this (pictured above). Currently on pre-order and due for release on May 25th, the device is about as consumer level as you can get.

At $1,299, it costs as much as a new desktop PC (and considerably less than the other leading consumer level 3D printer – the Makerbot Replicator) – but like all printers, they’ll get you on the cartridges! Yes, you heard me right – the Cube eschews traditional standardized filament rolls in favor of device-specific filament cartridges, with a variety of garish colors available for $50 each. The simplified loading process means switching out colors or loading a new cartridge is easy."

Obama's Public Equity Record is the Real Scandal

"Since taking office, Obama has invested billions of taxpayer dollars in
private businesses, including as part of his stimulus spending bill.
Many of those investments have turned out to be unmitigated disasters —
leaving in their wake bankruptcies, layoffs, criminal investigations and
taxpayers on the hook for billions. Consider just a few examples of
Obama’s public equity failures:

● Raser Technologies. In 2010, the Obama administration gave Raser a
$33 million taxpayer-funded grant to build a power plant in Beaver
Creek, Utah. After burning through our tax dollars, the company filed for bankruptcy
protection in 2012. The plant now has fewer than 10 employees, and
Raser owes $1.5 million in back taxes.

● ECOtality. The Obama
administration gave ECOtality $126.2 million in taxpayer money in 2009
for, among other things, the installation of 14,000 electric car
chargers in five states. Obama even hosted the company’s president, Don
Karner, in the first lady’s box during the 2010 State of the Union address as an example of a stimulus success story. The company has since incurred more than $45 million in losses and has
told the federal government, “We may not achieve or sustain
profitability on a quarterly or annual basis in the future.” Worse, the company is now under investigation for insider trading.

● Nevada Geothermal Power (NGP). The Obama administration gave NGP a $98.5 million taxpayer loan guarantee in 2010. The New York Times reported
last October that the company is in “financial turmoil” and that
“[a]fter a series of technical missteps that are draining Nevada
Geothermal’s cash reserves, its own auditor concluded in a filing
released last week that there was ‘significant doubt about the company’s
ability to continue as a going concern.’ ”

● First Solar. The Obama administration provided First Solar with more than $3 billion in loan guarantees for power plants in Arizona and California. According to a Bloomberg Businessweek report
last week, the company “fell to a record low in Nasdaq Stock Market
trading May 4 after reporting $401 million in restructuring costs tied
to firing 30 percent of its workforce.”

● Abound Solar, Inc. The Obama administration gave Abound Solar a $400 million loan guarantee to build photovoltaic panel factories. In February the company halted production and laid off 180 employees.

● Beacon Power. The Obama administration gave Beacon — a green-energy storage company — a $43 million loan guarantee. At the time of the loan, “Standard and Poor’s had confidentially given
the project a dismal outlook of ‘CCC-plus.’ ” In the fall of 2011,
Beacon received a delisting notice from Nasdaq and filed for bankruptcy.

● This is just the tip of the iceberg. A company called SunPower got a $1.2 billion loan guarantee from the Obama administration, and as of January, the company owed more than it was worth. Brightsource got a $1.6 billion loan guarantee
and posted a string of net losses totaling $177 million.

● And, of
course, let’s not forget Solyndra — the solar panel manufacturer that
received $535 million in taxpayer-funded loan guarantees and went
bankrupt, leaving taxpayers on the hook.

If Obama wants to attack Romney’s alleged private equity failures as
chief executive of Bain, he’d better be ready to defend his own massive
public equity failures as chief executive of the United States."

Thursday, May 24, 2012

Penn Goes Off on Obama, Weed, War on Drugs

Lessons from The Laffer Curve in the 1920s

What happened to tax revenues collected in the 1920s following a "tax cut" in the top marginal income tax rate from 73% to 24%? They went up, not down.

Thomas Sowell discusses the relationship between tax rates and tax revenues in his latest column:

"Democrats have been having a field day with the cry of "tax cuts for the rich" — for which Republicans seem to have no reply. This is especially surprising, because Democrats made the same arguments back in the 1920s, and the Republicans then not only had a reply, but one that eventually carried the day, when the top tax rate was brought down from 73 percent to 24 percent (see chart above).

Those who argue that "the rich" should pay a higher tax rate, and that the revenue this would bring in could be used to reduce the deficit, assume that higher tax rates equal higher tax revenues. But they do not.

After Secretary of the Treasury Andrew Mellon finally succeeded in getting Congress to lower the top tax rate from 73 percent to 24 percent, the government actually received more tax revenues at the lower rate than it had at the higher rate. Moreover, it received a higher proportion of all income taxes from the top income earners than before.

Something similar happened in later years, after tax rates were cut under Presidents Kennedy, Reagan and G.W. Bush. The record is clear. Barack Obama admitted during the 2008 election campaign that he understood that raising tax rates does not necessarily mean raising tax revenues.

Why then is he pushing so hard for higher tax rates on "the rich" this election year? Because class warfare politics can increase votes for his reelection, even if it raises no more tax revenues for the government."

MP: Part of the confusion about the relationship between tax rates and tax revenues comes about because we use the terms "raise taxes" to mean both "raise tax rates" and "raise tax revenues" interchangeably (e.g. "raise taxes on the rich"). In reality, "raising tax rates" could result in either "raising tax revenues" or "lowering tax revenues." Most of the discussion about "raising (or lowering) taxes" leaves out the most critical factor: the "tax base, i.e. the activity subject to be taxed," and its changes in the tax base that ultimately determine the relationship between "tax rates" and "tax revenues."

In the case of lowering the top marginal income tax rate from 73% to 24% in the 1920s, the "tax base" expanded so much in response to the lower tax rate that tax revenues actually increased, not decreased. In other words, history tells us that the way to impose a "tax hike on the rich" is to lower, not raise, the tax rate. Lower tax rates increase the incentives to engage in productive, taxable activities and increase the incentives to report instead of hide or shift, taxable income, and therefore raise tax revenues.

With marginal tax rates scheduled to increase next year, the lessons of history also tell us that the tax revenues collected next year will go down, not up. Reason? The tax base of activity subject to the higher tax rates will contract so much that the tax revenue collected will shrink, not expand. Next year's "tax hikes on the rich" will likely end up being a "tax cut" in revenues, and will make the budget deficit worse.

"Barring a successful last-minute legal challenge by environmental
groups, Shell will begin drilling test wells off the coast of northern
Alaska in July, opening a new frontier in domestic oil exploration and accelerating a global rush to tap the untold resources beneath the frozen ocean.

Industry experts and national security officials view the Alaskan Arctic
as the last great domestic oil prospect, one that over time could bring
the country a giant step closer to cutting its dependence on foreign
oil.

Other oil companies are already lining up to join Shell in the Arctic,
which company executives say could eventually yield a million barrels a
day of crude — or more than 10 percent of current domestic output."

From my McClatchy editorial, out for national distribution this week, here is a link to the version in today's Sacramento Bee:

"Since 2008, taxpayers have spent or provided loan guarantees of $6.5 billion for electric vehicles. That includes $2.4 billion for battery and electric drive component manufacturing, $3.1 billion in loan guarantees for electric vehicle projects, and $1 billion in tax credits for the vehicles. The price that American taxpayers pay for commercializing electric vehicles is painfully evident in the billions spent on green projects that are driven by politics rather than performance.

Using taxpayer dollars to favor one automotive technology over another is contrary to the free-market principles that undergird our economy. Simply put, subsidizing electric vehicles doesn't make economic sense.

The surest way to guarantee a product's failure is to subsidize it. Over time, cars that succeeded in the marketplace have been those that were developed and commercialized without government involvement. If a technology isn't capable of succeeding on its own economic merits, there's no amount of taxpayer support that will ever make it a commercial success."

Quote of the Day: Bastiat on Legal Plunder

"Legal plunder can be committed in an infinite number
of ways. Thus we have an infinite number of plans for organizing it:
tariffs, protection, benefits, subsidies, encouragements, progressive
taxation, public schools, guaranteed jobs, guaranteed profits, minimum
wages, a right to relief, a right to the tools of labor, free credit,
and so on, and so on. All these plans as a whole—with their common aim
of legal plunder—constitute socialism.

But how is this legal plunder to be identified? Quite simply. See if the
law takes from some persons what belongs to them, and gives it to other
persons to whom it does not belong. See if the law benefits one citizen
at the expense of another by doing what the citizen himself cannot do
without committing a crime."

The Federal Reserve released new data
today on delinquency and charge-off rates at U.S. commercial banks
for the first quarter of 2012. For consumer credit cards, the
delinquency rate fell for the 11th consecutive quarter to 3.07% during
the January-March period, which is the lowest level ever recorded since the Federal Reserve started tracking these data back in 1991 (see blue line in chart).

For all consumer loans, the first quarter delinquency dropped to 2.89%,
the lowest rate since the 2.8% reading in the first quarter of 2006, well
before the recession started (see red line in chart).

Delinquency rates for all consumer loans and credit card debt are both back
to pre-recession levels, and credit card delinquencies are at the lowest level ever recorded. Likewise, the charge-off rates for all consumers loans and
credit card loans are both back to pre-recession levels (data here).

The drops in delinquency and charge-off rates for consumer debt are consistent with the drops in the household debt service ratio (required payments on mortgage and consumer debt as a share of disposable personal income) in Q4 last year to 10.88% (red line in chart below), the lowest since 1993; and the drop in household financial obligations ratio (adds automobile lease payments, rental payments on tenant-occupied
property, homeowners' insurance, and property tax payments to the household debt
service ratio) in Q4 to 15.93%, the lowest since 1984.

MP: U.S. households appear to be managing debt better than at almost any time during the last 20 years, in terms of a record-low delinquency rate on credit card debt, a return of the delinquency rate on all consumer debt to pre-recession levels, and the lowest share of monthly disposable income in almost 20 years going towards monthly car loans/lease payments, monthly mortgage/rent payments, and monthly credit card payments in almost 20 years.

One Reason Why Oil Prices Will Remain Stable: U.S. Production Reached a 14-Year High in February

"The invisible hand steadying global energy markets is the growing
influence of modern technologies. So a case can be made for a relatively
stable crude-price window—$80 to $120 a barrel for the next several
years.

The growing influence of modern technologies is evident everywhere. Net
daily U.S. imports of petroleum have dropped by 50% to eight million
barrels over the last five years. Imports are likely to shrink further
in the coming decade due to an upsurge in domestic oil and gas supplies (see chart above).

Fracking and horizontal wells have given the U.S. an unmistakable
geopolitical advantage while moderating the market swings. Both
presidential candidates have a chance to accelerate U.S. energy
independence. Ambiguity, policy vacillation and an overreach on
uneconomical options (ethanol, wind) act as suppressants. But technology
and market forces trump politics. The march is on."

MP: The chart above shows monthly U.S. oil production starting in January 1998, and going through February 2012, when production reached 6,144,000 barrels per day. That was the highest monthly output of domestic crude oil in almost 14 years, going back to August 1998. New energy and geophysical technologies like 3D-seismic imaging, fracking and horizontal drilling have opened up huge reserves of previously unrecoverable oil and gas in the United States, and that's the main reason that crude oil production is close to a 14-year high. And it's one reason that "oil prices will keep falling," or will at least remain relatively stable.

Related from CBS News: North Dakota could double its oil production by 2015 to more than 1
million barrels daily, putting it on par with Texas "if everything goes
our way," according to the state's top oil regulator Lynn Helms. Billionaire Oklahoma oilman Harold Hamm said that Helms' prediction was probably accurate, if not a little low.

"We've
been saying for two years that North Dakota could be at 1.2 million
barrels a day by 2015," said Hamm, CEO of Continental Resources Inc.

3 Best Websites to Get A Free College Education

Education
and learning should be a lifelong process and the Internet is your
chance to get a university level education for free, regardless of where
you are in life, according to this article, which recommends these three websites
to get started:

Bakken 2? Oil Prosperity Comes to South Kansas; Could Be Largest Economic Impact in State History

Anthony, KAN. (CNNMoney) -- "It doesn't feel like we're in Kansas anymore. Oil
rigs are springing up in farmers' fields. "No vacancy" signs hang in
the windows of local motels, and a steady stream of trucks barrel
through Main Streets. Along the state's southern border, the once-quiet
farm towns are quickly transforming into oil boomtowns.

Hundreds of workers seeking high-paying jobs are flocking to places
like Harper County, which had resorted to paying people to live there
because of its declining population. Businesses are coming back from the
deadand a housing shortage has caused rents to triple.

Oil
companies began exploring Southern Kansas over a year ago, seeing
enormous potential in the area now that new technologies like horizontal
drilling and fracking have made it possible to tap into the oil-rich Mississippian Lime formation (see map above).

SandRidge Energy, which holds the most horizontal drilling permits in
Kansas, estimates there are about 15 billion barrels of recoverable oil
in this part of Kansas [MP: Estimates for recoverable Bakken oil range from 4 to 24 billion]. The company plans to drill 130 wells in the
state by the end of the year -- up from 10 last year. And its wells are
hitting oil 100% of the time.

"The oil companies aren't hitting any dry spots," said Mike Lanie,
economic development director of Harper County. "This is looking like it
could be the largest economic impact in the state's history, and for
many people in these small towns, this will be a blessing," he added."